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    COVER STORY: Stolen profits

    As more retailers put loss prevention at the forefront, they'll need to rely on a mix of new technology and basic training -- with commitment from the executive suite down to the checkout line.

    By Jenny McTaggart

    What supermarkets don't know about theft in their stores may be hurting them more than they'd care to acknowledge. Shrink due to criminal activity, a massive drain on the bottom line, shows no signs of diminishing. Overall retail shrink reported in 2002 accounted for about 2.32 percent of sales, according to the National Supermarket Research Group's 2003-2004 Supermarket Shrink Survey. That was a 3 percent increase from 2000/2001. But the figures don't take into account the shrink that supermarkets didn't know about.

    Internal theft -- which accounts for more than half of shrink -- is actually on the rise, according to the latest estimates from the Food Marketing Institute. And shoplifting, which remains a thorn in every retailer's side, has been joined in recent years by a more costly incarnation known as organized retail theft.

    But whether it's homegrown crime or thieves posing as shoppers, retailers are increasingly fighting back. At Fresh Brands the response is straightforward training for associates, and smart technology that scouts for "sweetheart" theft at the cashiers' lines. At Redner's Warehouse Markets, police officers cruise the aisles, while Albertsons, Ahold, and others are combining sophisticated snooping via analysis of data points throughout the store with the human touch of behavior modification.

    Shrink experts advise that aggressive loss prevention programs can lead to impressive savings. According to the Scottsdale, Ariz.-based National Supermarket Research Group, a 25 percent reduction in shrink could add $111,161 to a typical store's bottom line in one year. That's equivalent to increasing sales by 52 percent.

    To get there, however, supermarkets are being called on to demonstrate a new level of commitment, starting at the top.

    "If supermarkets are going to be successful at loss prevention, it's imperative that it reaches the executive suite. It hasn't done that yet," says Larry Miller, president of Scottsdale-based Trax Retail Solutions, which provides loss prevention, store operations control, and profit optimization solutions for the retail industry. "We have to get senior executives of both large and small companies engaged in loss prevention just as much as they're engaged in merchandising."

    Store associates under pressure

    Meanwhile, in fast-paced store environments, where employees are typically more attuned to getting customers through lines quickly than to keeping an eye out for crime, theft prevention becomes much more difficult. And with the industry's high turnover rate, training efforts may virtually be going to waste.

    As most retailers are all too aware, more than half of all theft is internal, and the frequency of employee theft seems to be on the rise. Fifty supermarket companies surveyed for FMI's latest Security and Loss Prevention Issues Survey (2003) reported a total of 30,449 incidents of employee theft, which breaks down to an average of 634 detected cases per company. That was a 17 percent increase from the prior year. FMI noted as well that the frequency of actual thefts tends to be much greater than the frequency of detected theft.

    Forty-two percent of the detected incidents occurred at checkout, according to the research. While almost half of those involved merchandise and/or cash theft, 23.5 percent of employee theft came from a combination of discounting, or "sweethearting," and sliding -- intentionally failing to scan.

    "The younger generation has learned to beat the system in sweethearting and pass-throughs," observes Gary Suokko, senior director of retail operations at Sheboygan, Wis.-based Fresh Brands, Inc. "They check out their friends and don't charge them for all the items. We had one instance the other day where a customer alerted the manager that someone left with a lot of items and didn't pay much." Among the fraudulent cashiers' other strategies: taping a UPC code from a less expensive item on the underside of the wrist, and then using that code to scan more expensive items, and hitting the void key to take off the last -- and intentionally most expensive -- item.

    Fighting back

    To help counter these types of crimes, Fresh Brands is rolling out a new POS system that will alert managers to certain variances among cashiers, Suokko notes. Still, he says, the most important thing the company can do is talk about the problem upfront with its associates during training.

    "You have to educate the cashiers that you know what they're doing. Some retailers maintain that if you don't talk about it, they won't get the idea. My philosophy is that they'll eventually figure it out themselves," he says.

    Notes Miller: "Over the last five years we've seen clearly 50 percent to 55 percent of dollar loss at retail shrink attributed to internal theft. It's dramatically more common for cashiers to commit crimes. They're the largest employee population in the supermarket."

    Many times prevention begins at the hiring process, observers note. "We encourage our clients to do all they can in the pre-employment screening process. Spend the money to hire the best employees and train them properly," says Mark Doyle, v.p. at Jack L. Hayes International, a loss prevention and inventory shrinkage control consulting firm based in Fruitland Park, Fla. "If you bring in the wrong person, it could end up costing you way much more money."

    Still, regardless of internal efforts, retailers continue to face severe losses from external theft, mainly due to shoplifting. In 2002 more than $9 million was recovered from shoplifting, and a total of 227,869 shoplifters were apprehended, according to the FMI survey.

    Hayes International's Doyle, however, says he believes that as retailers have focused more on internal theft in recent years, shoplifting has actually increased. "It's a problem you can't solve. We tell our clients you're not going to stop shoplifting -- you're just making it more difficult for them."

    "Shoplifters see it as a victimless crime," he adds. "They don't feel like they're hurting anyone -- they see the supermarket as a big corporation with plenty of money."

    In cases of potential shoplifting, customer service can double as a security precaution, Doyle observes. "We teach employees to go up and ask customers if they need help. Tell them, 'I'll keep my eye out in case you need anything.' If the shopper is really shopping, he or she will appreciate the help. If they're intending to shoplift, however, they'll know they're being watched."

    Sometimes the best deterrent to shoplifting is to conduct security pages in the store, according to David Clark, director of security and loss prevention at Redner's Warehouse Markets, based in Reading, Pa. Another strategy that Redner's, Fresh Brands, and other retailers employ is to have police officers walk through stores occasionally. In some cases retailers on a budget are paying off-duty police officers part-time wages to help with security. Ultimately, once potential shoplifters notice that you're serious about security, they'll think twice, Clark notes.

    Health and beauty care items are still the items most frequently shoplifted, research shows. Incidentally, more manufacturers of health and beauty care items are putting electronic article surveillance (EAS) sensors inside their products, Doyle says. Other items that tend to attract shoplifters include meat, analgesics, razor blades, and baby formula. The latter two are also frequent targets of organized crime rings looking to repackage merchandise for profit.

    Self-checkout machines might be magnets for shoplifters, especially if stores aren't taking the right precautions, according to David Mathews, president of Atlanta-based Shrink Sackers Consulting Services and Training. Through his self-checkout shrink consulting with several supermarket chains, Mathews says he was able to get away with self-checkout theft more than 50 times. He feels that many retailers aren't aware of the degree of the problem. "I always recommend that clients change their secret shopper policy to also look at what's going on with the self-checkout machines," Mathews says.

    In many cases crime at self-checkout is aided by employee complacency, Mathews observes. A routine problem is the overuse of security overrides by the cashiers, he says. "If a customer scans one item and puts two in the bag, the cashier is prompted with a weight discrepancy. Almost always these warnings are ignored and overridden, which means an item has just been lost."

    Self-checkout precautions

    He also points to security alarms, which are also often disregarded. "It's like the boy who cried wolf. When alarms go off, 98 percent of the time it's an error, so you barely see the cashier's head turn. The alarms are more effective as a deterrent, from what I've seen," he says.

    Mike Webster, g.m./v.p. at NCR's FastLane, based in Duluth, Ga., defends the steps that his company has made to address self-checkout shrink. "At FastLane we've changed our entire philosophy around security, to make it more accurate and more flexible," he notes. "We strive to design a system that offers a balance between ease of use and stock-loss control."

    Last fall FastLane commissioned a study to survey some of its leading retailers about their experiences with self-checkout. Two-thirds of respondents said they had seen no change in shrink, while one-third thought shrink had been reduced, according to Webster.

    In addition, FastLane's machines have a tracking system that tells managers which cashier made which transaction, and features detailed transaction logs, including interventions that were made by the attendant, he notes. "So if they're approving weight dimensions at a higher-than-average level, you'll know about it. It gives you an audit trail," Webster says.

    The machines can be integrated with a number of closed-circuit packages and EAS technologies, too, he adds.

    Luckily there's a new breed of technology systems on the horizon, mirroring FastLane's efforts. Digital video recorders, which are quickly becoming a popular choice among supermarkets, link videotapes of events with data-mining technology.

    The technology is helping retailers focus on the prevention side of loss prevention, which they weren't able to do before. "Over the last five years there has been a big shift in focus from loss prevention technologies that focus on battling purely external theft and shoplifting, such as CCTV, to solutions that help us understand where loss is taking place," says Rob Berman, retail industry v.p. at Duluth-based Teradata. "The need to dig deeper and understand where loss occurs internally is a business requirement, especially in grocery. Recouping even a fraction of lost revenue has a significant impact on the bottom line."

    Denise Brownell, v.p. of loss prevention at Bashas' in Chandler, Ariz., recognizes the benefit of using technology to address what she calls "the most prevalent and most costly crimes affecting our stores" -- the theft of cash and merchandise by employees. She says the company is fighting back by using a combination of education, training, and detection through POS software and video surveillance equipment.

    Bashas' is in the process of implementing NaviStor, an exception-reporting solution from Woburn, Mass.-based Retail Expert, Inc., which will allow the retailer to set up specific business measurements for reducing its exposure to shrinkage. In addition, Retail Expert is integrating Bashas' digital CCTV store technology into the solution.

    RFID and loss prevention

    Of course, rolling out new technology systems still requires training and communicating clearly to employees the importance of loss prevention efforts. This philosophy drives Trax Retail Systems in its work with retailers that include Albertsons, Winn-Dixie, Ahold, Supervalu, Harris Teeter, and others. The company's loss prevention suite, which focuses on prevention, could be divided into two mechanisms, according to Miller: technological and behavioral. The technology aims to prevent cashier- and vendor-related shrink before it happens by using intelligent data mining to analyze data points throughout the store. Meanwhile narrative action plans provide store managers with information about their most shrink-sensitive areas, as well as employee productivity opportunities.

    Technology providers are excited by the additional possibilities that radio frequency identification technology holds for the future of loss prevention. "RFID will impact loss prevention technology significantly. Many retailers are adopting the use of RFID as a way to not only identify physical theft internally and externally, but also as a means to identify the loss of goods throughout the supply chain," notes Teradata's Berman.

    RFID could make a notable difference in cases of employee theft as well as shoplifting, adds Judy Dobson, managing partner for NCR Store Performance Consulting in Duluth. "With RFID the item now has a positive ID. The cashier no longer has the discretion to key in things. Also, RFID isn't a line-of-sight technology. If something is concealed, it's still likely to read." In addition, it could be possible to write validation information on a tag to verify that the item had been paid for, she notes.

    In cases of organized retail theft, a "smart shelf" could potentially detect if a person went to take a handful of items off the shelf. That detection would alert the loss prevention department in real-time mode. Tesco in the United Kingdom is one retailer that's testing smart shelves, although at the moment most of its efforts are aimed toward inventory management and replenishment, Dobson says.

    In that sense Tesco isn't all that different from its U.S. counterparts. Part of the reason may be that since retailers aren't exactly aware of how much they're losing, they don't have an idea of how much to invest in prevention.

    "The problem with the solutions out there at the moment is that nobody really knows the return rate on fraud," says Nathan Smith, business development director at Sysrepublic, a retail software provider and consultancy based in Mountain View, Calif. "Is it worth spending time and man-hours to track one person down?" He says his and other companies are working to find out.

    By Jenny McTaggart
    • About Jenny McTaggart

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